India: Proposals against new attempts to privatise state-owned banks

11 March by Eric Toussaint , Sushovan Dhar

Public sector banks account for more than two-thirds of the banking market in India. Currently, they are subjected to a systematic smear campaign launched by the reactionary Narendra Modi government, big media including the international press such as the Financial Times. [1] These canards are aimed at accelerating the privatisation drive underway since the 1990s. Critics of the public sector argue that the banks would be much more efficient and serve public interest better if they were fully privatised. The fact that there is a series of scams about the misuse of bank funds for the benefit of big Indian capitalists adds fuel to this campaign. What is the real story?

Let’s look at the financial scam that erupted in 2018 involving the private capitalist Nirav Modi [2] and the state-owned Punjab National Bank (PNB). This public sector bank had fraudulently granted credit to Nirav Modi. PNB officials issued Letters of Undertaking (LOU) that allowed him to borrow from Antwerp, Frankfurt, Hong Kong, Mauritius and Bahrain, without these loans being recorded in the PNB accounts in India owing to genuine manipulations. The amounts were therefore not communicated to the Reserve Bank of India (RBI), the Indian central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

in charge of controlling the country’s banks. The bank officials who carried out these operations did not communicate the SWIFT codes associated with these transactions carried out abroad. The scam amounted to nearly US$2 billion. [3]

These various scandals clearly indicate that the management of the public sector banks have turned these into the cash cows for big Indian capitalist groups. [4] A very big chunk of the credit granted by the banks is destined for large private corporations that borrow cheaply and default, even when they continue making profits. In the jargon of the Indian press, these are referred to as “wilful defaulters”. The total amount of credit to these large groups is colossal.

Those responsible for the recent scandals, Nirav Modi and Vijay Mallya, also escaped Indian judicial system by leaving the country before any prosecution. The Ministry of Finance has published a list of these “wilful defaulters” and, while little action is being taken to prosecute the private sector beneficiaries, the government is planning to recapitalise public sector banks to deal with the hole left by these frauds. The recapitalisation plan amounts to US$32 billion. The extravagant amounts of fraud and wilful default, which result in considerable losses, fuel the thesis that the privatisation of public sector banks must be accelerated. A shock argument used in this campaign is the high rate of non-performing assets (NPA or NPLs, i.e. loans that have been in default or in arrears for at least 3 months) of public sector banks - the overwhelming majority of these NPAs is the result of large indebted corporates not repaying their debt. It should be stressed that the default rate of the working classes is low.

This deserves to be re-situated in its international context. The rate of NPAs on total loans granted in India is 10% for the banking sector as a whole and 12.5% for public sector banks. In June 2017, NPA rates were 46% in Greece, 44% in Cyprus, 17% in Portugal, 13% in Slovenia, 12% in Bulgaria, Italy and Ireland, 11% in Hungary, 10% in Romania [5]. A simple comparison indicates that the rate of NPAs in India is either significantly lower or equivalent to these above-cited rates. The public opinion in the country could be reoriented if these high rates were known to common Indians. Especially since, in the European countries concerned, NPAs are mainly on the shoulders of the private banks. In 2019, the NPAs in Italy represented more than twice the number of NPAs in India, while the Indian population is fifteen times than that of Italy.

Whither public sector banks?

The government led by Narendra Modi took power in 2014 with a proclaimed desire to privatise the public sector, including banks, to the maximum extent possible. The arguments put forward are: “there is no alternative” to privatisation. The RBI management has often supported this orientation mostly acting as a stooge of the government. However, opposition from trade unions and forces inside and outside parliament has not given them a free hand. And the United Forum of Bank Unions has called for a two-day bank strike starting 15 March 2021 against the proposed privatisation of public sector banks. The government wanted a creeping divestment, but control still remains in state hands. That is why today the supporters of privatisation are becoming more aggressive.

Over the past 20 years, several governments have been in favour of privatising public sector banks. In 2015, the government had suggested privatisation, but the then RBI Governor did not back the idea. For more than 50 years, successive governments have chosen not to pursue it beyond a certain point. As the former RBI Governor, Y. V. Reddy said, nationalisation was a political decision, so privatisation will have to be a political decision, too. In this context, the privatisation of two banks and the indication to go further is a major reform that indicates a change in political approach. These measures, as well as the creation of a fully bank-owned Asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). Reconstruction Company, underline an approach of finding market-based solutions to the challenges in the financial sector. But before getting to the heart of the matter, let’s look at the performance of private sector banks.

Are private banks really doing better? The market share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of private banks in terms of lending increased from 21.26% in 2015 to 36% in 2020, while the share of public sector banks decreased from 74.28% to 59.8%. Competition has intensified after the RBI has allowed more private banks since the 1990s. They have increased their market share through new products, new technologies and better services, and have also attracted better valuations on the stock markets - the HDFC Bank (established in 1994) has a market capitalisation of $120.55 billion while the State Bank of India commands only $47.95 billion. India has 22 private banks and 10 small finance banks.

However, in recent years, a lot of questions have arisen about the performance of private banks, particularly on governance issues. The CEO of ICICI Bank, Chanda Kochhar, has been fired for extending dubious loans. Yes Bank’s CEO, Rana Kapoor’s term was not extended by the RBI and is now under investigation by various agencies. Lakshmi Vilas Bank faced operational problems and merged with DBS Bank of Singapore. In addition, when the RBI ordered an asset quality review in 2015, many private sector banks, including Yes Bank, were found to be under-reporting NPAs. The former managing director of Axis Bank, Shikha Sharma, was also denied an extension. Why is the government so insistent on privatising public sector banks when the performance of private sector banks is nothing to write home about? Two reasons: private companies, including banks, covet the assets of public sector banks that are up for grabs at derisory prices. Secondly, until the public sector is dismantled and private actors have a monopoly, they fear that they will not be in a position to dictate the market as they wish.

Viral Acharya, the Deputy Governor of the RBI, was even more outspoken. He believes that the public sector banks have not only performed poorly, but because of their public character, they have managed to attract a disproportionate share of deposits, including bulk deposits. As he said in an interview with BloombergQuint, “Once you have the name of India, Maharashtra or a state in the name of the bank, the depositor implicitly knows that the bank is very, very safe”. So even public sector banks with poor balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets and poor performance attract large deposits. The tendency for deposits to migrate to public sector banks has, in his view, two consequences for private actors in the banking sector. First, it keeps the private sector small, since the volume of activity of private banks is limited by their small deposit base. Secondly, private banks cannot risk lending to sectors where risks may be higher or profits lower because they cannot hedge adequately against potential losses in these sectors by investing in both these sectors and those in which profits are more certain and perhaps larger.

Acharya’s real problem is not the NPAs of the banks, but the inability of the private sector to develop despite the liberalisation of the banking space. The solution lies in shrinking the public sector and the expansion of the private sector. He adds that “research shows that there are banks in the private sector such as HDFC Bank, Kotak ... which are so well capitalised that they actually have the capacity ... to take over the healthy parts of the business that public sector banks are doing.” It is clear that public sector banks have a network of branches and franchises that would be very valuable, even for private sector banks. In short, the strategy is to separate the healthy parts of the public banks and sell them to private banks so that the latter can grow at the expense of the former.

If we look at the Indian economy, we see that public sector banks played the most crucial role in financing the boom in the real economy. Already, the banking sector reforms launched in the early 1990s following the recommendations of the Narasimham committee - I sought to deregulate interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, reduce the statutory liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ratio and the cash reserve ratio, and also dilute the norms of priority sector lending. All this was aimed at reducing the share of government and sectors such as agriculture and small industries in bank lending and increasing the share of the private corporations. The economic boom was sustained by private investment financed by increased credit flows from public banks, made possible by declining nominal and real lending rates. These credit-financed investments, particularly in the infrastructure sector, played a crucial role in generating high levels of economic activity in the aftermath of the global economic crisis in 2008-09, even in the context of rising interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates. Such a growth trajectory proved unsustainable, however, when the expansionary phase ended in 2011-2012 and bad loans began to accumulate in the banking system. Two important aspects of this growth experience need to be considered. First, there was a marked difference in the lending behaviour of public sector banks and private or foreign banks during the economic expansion phase, indicating that the state played a large role in determining the flow of credit. Not only did the former replace domestic financial institutions in providing long-term financing to the corporate sector, but such lending to the infrastructure sector, for example, was also done in tandem with the state’s economic strategy, especially during the 11th Five-Year Plan.

The end result was an unprecedented accumulation of NPAs on the balance sheets of public sector banks. The model of universal banking seems to have failed in the Indian context, where public sector banks have largely financed long-term projects. Since most of the resources of these banks are raised through short-term deposits, such project financing involves unwarranted risks for the sector. Secondly, the fact that heavily indebted private companies can still manage to take out large volumes of new credit from public sector banks indicates a systemic malaise, which former RBI Governor Raghuram Rajan had termed ’risk-free capitalism’. The magnitude of this phenomenon cannot be minimised as simple aberrations. Moreover, if the accumulated NPAs were to be eventually written off or disappear from bank balance sheets by means of a state-funded bailout via a ’bad bank’ - as has already been proposed - this would amount to gratuitous transfers by the state to private corporations. The question to be asked is: why does the state choose to subsidise private companies rather than undertake these investments itself? In other words, the relationship between the state and the private enterprise sector in India in the post-reform period needs to be critically examined in the light of this experience.

The fact remains that the Indian situation, while not as dramatic as the dominant discourse suggests, requires radical solutions. The measures that should be taken are to :

These are emergency measures that should pave the way for the full socialisation of the Indian banking sector. [7]

The smear campaign against the public banking sector in India overlooks an important lesson from the banking crisis that began in 2007-2008 in the US and Europe: the Indian banking sector was hardly affected by the crisis because banking deregulation had not advanced as much in India as elsewhere, which prevented public banks and, to some extent, private banks, from placing large amounts of their assets in foreign markets, especially the US and European markets. The relative financial protectionism observed by the Indian banking sector protected it from contagion effects.

It is important to remember that the Indian banking sector was opened up to private capital in the 1990s. Seven new private banks entered the market between 1994 and 2000. In addition, more than 20 foreign banks have started operating in India since 1994. The privatisation agenda unveiled by the neo-liberal reforms continues to gain momentum with successive governments pushing it further. Current government initiatives speak of an outright sale of public sector banks to private interests. During the budget presentation in early February 2021, India’s finance minister announced the sale of two banks to the private sector. Analysts point out Bank of Baroda (BoB) and Punjab National Bank (PNB) as possible candidates. The fascist government’s drive to accelerate privatisation must be resisted.


[1See Financial Times, Modi shatters taboo with plan to privatise state banks, 7 February 2021

[2Nirav Modi was implicated in 2018 in a nearly $2 billion fraud case at Punjab National Bank in India, he was also sued in the state of California for $4.2 million for defrauding Los Angeles entrepreneur Paul Alfonso. See Sushovan Dhar, The Infrastructure Leasing & Financial Services (IL&FS) Debt Default: Privatize Profits, Socialize Losses? published on 15 January 2019

[3Wikipedia, Punjab National Bank Scam, consulted on 7 February 2021

[4See Sushovan Dhar, Corporate debt: the catalyst for the next crisis in India?, published on 30 June 2019,

[5NPL rates increased in June 2017: 6% for Poland, 5.5% for Spain, 4% for Austria, Malta and Sweden, 3.6% for France, 2.5% for Belgium, 2% for Germany. For an update of the data in 2020, see European Commission, Questions and Answers: Tackling non-performing loans, accessed on 7 February 2021

[6As on 1 March 2021: €1 = just under INR 89 and $1 = over INR 73

[7For a presentation of what the socialisation of the banking sector means, see Éric Toussaint and Patrick Saurin, How to Socialize the Banking Sector published on 14 June 2018

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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